THE US Securities and Exchange Commission is hoping to boost private sector development of XBRL tools for investors with the launch of a new graphic-rich interactive data viewer.
The Financial Explorer application will be released under an open-source license to enable developers to create tools for investors to read and analyze company financial reports tagged in XBRL (Extensible Business Reporting Language).
The regulator foresees that it will eventually become possible for investors themselves to develop their own applications for crunching tagged financial information, such as in the form of mini applications or widgets shared on the Internet.
So what does the SEC’s new tool do? Well, not a whole lot that I would get excited about just yet.
The SEC’s news release promises that “at the click of a mouse, Financial Explorer lets investors automatically generate financial ratios, graphs, and charts depicting important information from financial statements. Information including earnings, expenses, cash flows, assets, and liabilities can be analyzed and compared across competing public companies.”
In reality, the ratio information is sparse and I wasn’t able to easily compare financial information for competing public companies at the click of a mouse, partly because so few companies are providing their financial data in XBRL, and partly because a “compare-to-X-company” function doesn’t exist. To “compare” you have to view each company’s information separately.
|The Financial Explorer can dynamically generate charts based on filings accessed in near real-time. But the atom charts are a somewhat unconventional visualization of data and take some getting use to.|
I also found the choice of atom charts a little strange, hard to get use to, and not all that helpful. There is a page of instructions explaining how to read the charts and a useful contextual help menu, and between the two I got the charts figured out after a while. But I can’t say they added anything to the user experience.
Perhaps the best feature is the definitions that can be accessed at the click of a mouse without having to leave the page you’re viewing. But I still wanted more, such as the ability to access context from the MD&A and footnotes without leaving the financial statements, something a few companies did years ago (IBM, Onex Corp. spring to mind) through very tedious HTML coding. Doing this allows investors to understand not only what changed and by how much, but also why.
|Access to line item definitions via contextual help is handy to have as are the little bar graphs. But neither explains why figures changed over the periods. This is where linked MD&A and Footnote snippets would be valuable.|
Of course, the true power of XBRL cannot be seen by using the Financial Explorer. The real revolution is under the hood, in the tags around bits of financial information in companies’ financial reports. These tags mean that the Financial Explorer can automatically “read” new financial filings almost immediately companies file them with the SEC or post the data on their websites and in their RSS feeds, leading to dramatically fewer errors, delays and costs.
Carrot for developers, stick for issuers
But the point of the Financial Explorer is not really to be a real-world application. The SEC is not getting into the software business. Instead, it is a demonstration of what can be done with XBRL with fairly little effort. If a regulator can build something like this, imagine what the private sector experts could do.
And that is part of the SEC’s reason for developing these tools. It hopes to kick-start development by the software and financial information industries of XBRL tools for investors. The SEC will be releasing the source code for the Financial Explorer to the developer community, as it has done with a different viewer.
Of course, the other challenge for the SEC is to make sure there is a supply of financial data for the new tools to use. According to the SEC, it only has 307 XBRL filings from 74 companies, including the likes of General Electric, Microsoft, PepsiCo and United Technologies.
Later this year, the SEC is expected to approve a rule to make XBRL mandatory, possibly phased in over several years starting with large companies first. A committee advising the SEC on improving the financial reporting system has recommended a three-year phase-in, but the SEC is not bound by the advice.
Update: Jack Ciesielski of the Analyst’s Accounting Observer tests the tool and comes to the same conclusion as me about the importance of integrating footnotes and the MD&A into the tool. So there’s a hint for prospective XBRL developers.